Sunday, January 23, 2011

Glaeser on High Real Estate Prices and Low Population Growth in Liberal Places

In a short OP-ED, Professor Ed Glaeser sketches the puzzle of his home state. Massachusetts is experiencing lower population growth than the nation but has relatively high home prices. Glaeser argues that limits to housing supply in such liberal places explains this fact. At the other extreme is Texas, with no limits to growth, few liberals, little home price appreciation and lots of population growth. Glaeser points to the loss of a Congressional Seat as evidence that MA has shot itself in the foot by slowing growth. Is this last statement correct?

Why are home prices high in Boston? It ain't the weather or the accents. Boston is a quaint University town that resembles NYC's little brother. Having lived there for 9 years, I do believe that its liberal culture has blocked housing growth but this same "liberal ideology" has led to funky restaurants to open, historic architecture to be preserved (cobblestone), walk and ride public transit stations to be valued, and to a celebration of its elite research universities. Every fall the city comes to life as a new cohort of 18 year olds arrive to start their intellectual (and drinking) journey.

So, what is my point? The presence of liberals in a city does block new housing supply but I believe that they have a causal role in increasing the city's quality of life. Joel Waldfogel's Consumption Externality stories can be used here. For example, if creative hippies live in larger numbers in a certain part of Boston then funky stores will locate nearby to sell to them. You won't see Starbucks and Barnes and Noble there.

Implicit in Glaeser's argument is the claim that blocking new housing supply only creates monopoly rents for the home owner incumbents. While this is true, the same people who block new housing have bundled into them this secondary valuable attribute of increasing demand for walkable "Richard Florida" neighborhoods (and I value that). In fact, these folks are probably Richard Florida's readers and are literally "walking the walk".

How many books does Richard Florida sell in Texas (outside of Austin)? So, could Houston become "funky" if liberals moved there? The Waldfogel hypothesis would say "yes" but this begs the question of how they choose where to go. Major universities such as Harvard, University of Chicago, Columbia, Berkeley act as beacons and liberal towns form around them. These towns then pass laws making it hard to grow and this ensures that there "club" remains pure as the barbarians are kept at the gate.

There is a formal identification problem here. Are Boston home prices high solely because liberals constrain new housing supply or do their actions set off a domino effect such that the high home prices (brought about in part by housing regulation) mean that the community self selects only the funky subset of people who really value the "Boston Culture" and an emergent property of this group living together is a higher quality of life city --- and this further increases demand to live in such a city? So, this second story is about how limits to growth keep Boston "cobblestoned and quaint" and this further increases the demand for the unique lifestyle that Texas can't offer.

4 comments
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There are other possible reasons for smaller families in places as Boston. If you work for your living and are not one of the top (rich who don't want the distraction of children) nor bottom who are on welfare you cannot afford housing and children at the same time. The property taxes and then add the state and local taxes the wage earner cannot afford a house and children also. The cost of housing in places like TX is much cheaper and property taxes are there is no state income tax.